KOF Bulletin ECONOMY AND RESEARCH AGENDA CUSTOMER SERVICE >> IMPRINT >> No. 70, January 2014

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1 No. 70, January 2014 ECONOMY AND RESEARCH KOF Investment Survey: Investment Volume on the Rise >> KOF Winter Forecast 2013: A Bright Outlook for the Swiss Economy >> Overnight Turnaround in Construction Investment: From Crisis to Boom >> Global Economy: Industrialised Countries Recover, Emerging Markets Slow Down >> AGENDA KOF Events >> Other Events >> CUSTOMER SERVICE >> IMPRINT >>

2 ECONOMY AND RESEARCH << KOF INVESTMENT SURVEY: INVESTMENT VOLUME ON THE RISE Swiss companies are once again stepping up investments. Investment activities among the respondents of the KOF Investment Survey carried out in autumn 2013 increased by around 3.1 per cent in Companies are planning a further rise in investments in the coming year. The results of the current autumn survey paint a rather moderate investment picture. The answers given by the companies surveyed result in an approximately 3.1 per cent increase in capital investments in This figure is very much in line with the current economic trend. The latest KOF Economic Forecast anticipates a 1.4 per cent increase in capital investments. The discrepancy between the two figures arises from different definitions of the term capital investment. Capital investment according to the National Accounts (NA), on which the KOF Forecast is based, covers the entire Swiss economy, including private households, companies and the public sector. In contrast, the rates of change according to the Investment Survey are based on the information provided by the companies surveyed. The current Investment Survey was carried out among a panel of over 8,000 companies that reflects the structure of the Swiss economy. Neither the public sector, nor semi-public enterprises or private households are included in the calculation of the investment figures. Companies investment plans represent a key indicator for the economic trend. Although the information provided for the current year is always the most accurate since it is mostly based on investments already carried out, our main focus of attention is on the companies outlook for the future. The current investment plans indicate an increase in capital investments of around 4.2 per cent in At 2.9 per cent, the growth rate of the overall economy according to the current KOF Forecast is in a similar range. INCREASE IN INVESTMENTS DRIVEN BY SERVICE INDUSTRY The Investment Survey also allows for a breakdown of rates of change in investment spending according to sector. In 2013, the respondents in industry 90 and construction reduced their investment spending. However, this decline in investment was more 85 than offset by an increase in the service sector. 80 According to the survey, the latter will continue to drive the increase in capital investments in 2014, 75 albeit at a slower pace than in The industrial sector is expected to record positive rates of change in G 1: Capacity Utilisation Has Bottomed Out Original Seasonally adjusted Smoothed Long-term average The current trend in capacity utilisation also indicates increasing investment activities in the indus trial sector. Having declined over the entire year 2012, capacity utilisation seems to have bottomed out at the end of 2012/beginning of 2013 (see G 1). Since the start of the year, there has been a slight rise in capacity utilisation, resulting in a decline in free production capacities. This development, in turn, should have a positive impact on the companies investment behaviour. 2

3 While the industrial sector and the service industry expect an increase in investments, construction companies anticipate a further decline in Given the exceptionally favourable business climate in the last few years, this decline in investment figures is pointing towards a normalisation of the situation rather than an imminent crisis. HIGHER RELIABILITY OF INVESTMENT REALISATION Investment plans may diverge considerably from effectively realised investments. In order to assess planning security, and hence the reliability of the forecast figures, companies are asked questions regarding the reliability of their investment realisation. Investments by industrial companies are more likely to be realised now than in spring (see G 2). After planning reliability in industry for the year 2013 had reached a historical low with close to 24 per cent of companies stating in autumn 2012 that the realisation of their investment plans was either rather unsure or fairly unsure, the realisation of planned investments by industrial companies in 2014 appears to have become more reliable. The opposite picture emerges in the service sector. Realisation reliability has declined slightly although it is still higher than in industry and construction. All in all, the information provided by the respondents indicates that realisation reliability has improved slightly compared to 2013, although the figures are still substantially lower than the precrisis level. Due to consistently low realisation reliability, the forecast 4.2 per cent increase in the investment volume should be taken with a pinch of salt. Furthermore, the majority of companies do not intend to increase investments this year. The balance between companies anticipating higher capital investment in 2014 and those planning lower investments is actually negative. This means that there will be more companies reducing their investments in 2014 than companies stepping them up. Nevertheless, on the whole, the investment volume will rise. 3

4 KOF WINTER FORECAST 2013: A BRIGHT OUTLOOK FOR THE SWISS ECONOMY The Swiss economy will experience positive development over the next two years. According to the latest KOF economic forecast for 2014, the gross domestic product (GDP) will grow by 2.2 per cent in This promising development will continue in 2015 with an increase in GDP of 2.3 per cent. In the coming year, companies will once again be investing more in machinery and equipment. Unemployment will remain stable at just over 3 per cent. The KOF continues to be optimistic as far as the Swiss economy is concerned: the GDP forecast from the fall of 2013 for the coming two years remains essentially unchanged. Private consumption is developing vigorously, and should show 2.2 per cent growth in 2014 (see G 3). For the following year, the KOF is expecting almost unchanged consumer dynamism; the increase will stand at 1.9 per cent. Public consumption, however, will only increase slightly in the coming year (2014: 0.4 per cent) due to the austerity plans of many Swiss cantons. In the year after that, public consumption should once again be on the rise (2015: 1.6 per cent) because of the robust economic development For the next two years, the KOF expects a positive tendency in employment: job growth in the coming 100 year will reach 1.5 per cent and, in 2015, even 1.8 per 80 cent due to the positive economic developments (see G 4). In contrast to recent years, the job 20 growth will have broader foundation, since the employment situation in industry will be improving somewhat. As already mentioned in the Number of registered unemployed, left scale Fulltime equivalent employment, right scale autumn forecast, the labour market is currently exhibiting a mismatch, as it were: a certain percentage of the unemployed people do not have the proper qualifications for the positions advertised. So the strong rise in employment figures predicted by the KOF will not be substantially reflected in a lower unemployment rate. Looking ahead, the KOF continues to see an average unemployment rate of 3.1 per cent for next year and 3 per cent for the year after G 3: Switzerland: Real GDP With Forecast (annualised quarter-on-quarter change, in %) Forecast, 23 Sept Forecast, 17 Dec G 4: Employment and Unemployment With Forecast (in 1,000 persons, seasonally adjusted) Prices will continue to develop very moderately. For the coming two years, the KOF only expects a very limited increase in prices; the inflation rate should reach just about 0.3 per cent and 0.7 per cent, respectively. Likewise, wages will only increase relatively weakly in the coming two years because the negative inflation of the years 2012 and 2013 will not generate inflation compensation. In the coming year, the nominal average growth in employee income will be 0.9 per cent and 0.4 per cent in real terms. Growth in the following year will also be cautious, namely 1.2 per cent nominally and 0.5 per cent in real terms. 4

5 Construction investments in 2014 will see a positive tendency (2 per cent) thanks to the substantial backlog of orders in residential construction, major civil engineering projects, and a sustained expansion of the health infrastructure. This activity is expected to come to a halt in Construction investments will be declining in particular in tourist regions due to the Second Home Initiative, which won a majority of votes in a referendum in March 2012 and which bans the building of second homes. By the same token, investments in machinery and equipment will expand through - out the period, not only in the service sector but also in industry, where investments are ultimately weak. Overall, an increase of 3.7 per cent is to be expected in the coming year. This rate will rise to 7.8 per cent in Current prices will not be increasing as much since the prices for machinery and equipment are expected to decline further. The KOF expects a greater volume of exports thanks to the recovery in the industrialised nations. Export of goods will increase by 3.8 per cent in 2014 and the export of services by 4.7 per cent. In 2015, the growth in export of goods will be distinctly higher due to the sustained recovery experienced by industrial nations. Imports will evolve in a similar manner to exports. After growing by a mere 0.2 per cent in the current year, import growth will jump to 3.2 per cent in the coming year and 5.9 per cent in the year after. Over the past few weeks, the Swiss franc rose against most currencies, but hardly at all against the euro (see G 5). Consequently, the franc /euro exchange rate is still trending distinctly above the minimum rate set by the Swiss National Bank (SNB). The anticipated low inflation rate gives the SNB enough leeway to maintain its expansive monetary policy and then choose the moment to abandon the minimum exchange rate with great care. The end of the forecast period should see a rise in interest rate. G 5: Exchange Rates With Forecast CHF / EUR CHF / USD CHF / 100 Yen Based on these trends, the KOF expects the Swiss economy to grow by 2.2 per cent next year and by 2.3 per cent the year after. With the persisting high population growth, per capita economic output will also be increasing over the coming years (see G 6). G 6: Real GDP and GDP per Capita (percent changes) Real GDP Real GDP per Capita KOF ECONOMIC FORECAST How much GDP growth does the KOF expect for this year? How will the labour market develop? You find the latest KOF Economic Forecasts here: >> 5

6 OVERNIGHT TURNAROUND IN CONSTRUCTION INVESTMENT: FROM CRISIS TO BOOM In the last few years, construction cranes have dominated the horizon not only in Zurich but all over Switzerland. Nevertheless, in August 2013, official statistics still confirmed a decline in cons - truction investment in These figures have now been corrected. Once again, it has been shown that macroeconomic data may be subject to significant change, a fact that makes forecasting a rather difficult business. The Swiss Federal Statistical Office (FSO) publishes construction industry statistics for the previous year in the context of the National Accounts (NA). These statistics are released every August. The FSO calculates the construction industry figures on the basis of a series of data, including the Construction Statistics. The latter are compiled by the cantons and municipalities and are based on a comprehensive survey including nominal construction expenditure. The Construction Statistics are usually published after the KOF Autumn Forecast, with the first provisional extrapolation of the statistics having been released in summer. This year, however, the extrapolated figures were not published. FROM MINUS TO PLUS A discrepancy has arisen between the data for the previous year as published in August and the data according to the Construction Statistics of November. While the price-adjusted August publication for the year 2012 shows a significant slump in construction investment ( 2.9 per cent), the Cons truction Statistics indicate substantial growth in the construction industry (+2.6 per cent). Hence, construction investment in the past year was under estimated by approximately 5.5 percentage points (see G 7). The FSO is likely to consider the G 7: Real Construction Investment (in million CHF, at 2010 prices) Forecast, 23 Sept Forecast, 17 Dec results of the recent Construction Statistics in its coming review of the NA; KOF already included the review in its December forecast that was published at the beginning of this month. The diverging data for the past year have a significant impact on the construction forecast. The KOF Autumn Forecast 2013 was based on the FSO August publication. The reported negative value of close to minus three per cent in the FSO s August data resulted in a substantial catch-up movement for 2013 and 2014 in the KOF forecast. Based on the construction statistics data, the slump in construction in 2012 has disappeared and the catch-up movement for the years 2013 and 2014 is therefore less significant. The level of construction investment forecast for the coming year is still similar to the level anticipated in the autumn forecast. 6

7 CONSTRUCTION FORECAST FOR THE COMING MONTHS Thanks to full order books in the residential construction segment, large project volumes in the civil engineering field and a consistent expansion of the healthcare infrastructure, construction investment is expected to develop positively in the coming year, with dynamics petering out in Due to the Second Home Initiative, construction investment is likely to decline as of 2015, particularly in tourist regions. Growth in residential construction will slow down as a consequence of tighter financing conditions and is expected to stagnate in However, consistently strong immigration, low interest rates, employment growth and robust economic development will ensure that residential construction investment will rise again in the medium-term. GLOBAL ECONOMY: INDUSTRIALISED COUNTRIES RECOVER, EMERGING MARKETS SLOW DOWN While the industrialised countries are starting to pick up speed and the Chinese economy remains robust, growth prospects in key emerging markets have clouded over. This has a slowdown effect on developing economies. Dynamics in the global economy will remain subdued for the foreseeable future. According the latest KOF forecast, the global economy will progressively pick up speed until the end of This is due, among other reasons, to the central banks relaxed monetary policies. In addition, fiscal policies will be less constricting. This is particularly true for the USA where fiscal strains caused by sequestration will remain noticeable in the 2013/2014 winter season but will subside there after. The KOF expects the USA to record very mode rate inflation with GDP growth of 2.1 per cent in the coming year and 2.7 per cent in 2015 (see G 8). G 8: USA: Real GDP With Forecast (seasonally adjusted) On annualised basis in % Index, 2005= % 2.1% 2.7% Qoq change, left scale KOF estimate / forecast Level, right scale KOF estimate/forecast EUROPE: RETURN TO GROWTH The EU put an end to the economic downswing in In the course of the coming year, economic prospects will improve (see G 9), not least due to the high dynamics expected for the German economy (2014 GDP growth: 2 per cent). Private consumption will continue to be driven by pay rises that significantly exceed the inflation rate, while investment activities will benefit from the accelerating domes tic economy and consistently favourable financing conditions. Although the French economy is expected to gain some ground in the coming year, fiscal policies will put a damper on the development. G 9: European Union (EU-28): Real GDP With Forecast (seasonally adjusted) On annualised basis in % Index, 2005= % 1.3% 1.6% Qoq change, left scale KOF estimate/forecast Level, right scale KOF estimate/forecast 7

8 The Italian economy is also expected to recover, albeit at a slow pace with 0.4 per cent growth in the coming year. High unemployment and unfavourable financing conditions caused by the precarious situation of numerous banks are slowing down progress. All in all, the domestic economy will send out few growth impulses while foreign trade will be the main driving force. This year s upswing in the UK is expected to continue, albeit at a slower pace. Fiscal consolidation is placing a strain on growth. Furthermore, the fear of a renewed real estate bubble could lead to a further cut down of government support programmes. All in all, the UK economy is expected to expand by 2.4 per cent in the coming year. Price pressure is likely to remain high while unemployment is expected to decline. JAPAN: VAT HIKE MAY SLOW DEVELOPMENT This year, the Japanese economy grew faster than the European or US economies (GDP growth of 1.8 per cent). However, due to anticipatory effects, the planned VAT increase in April 2014 is expected to result in a substantial hike in consumption in the first quarter 2014 and a significant slump in the following quarter. As in the current year, a new economic stimulus package for 2014 has been announced to offset the negative effects of the VAT hike. In 2014, the Japanese economy is expected to grow by 1.6 per cent, in 2015 by 1.3 per cent G 10: Japan: Real GDP With Forecast (see G 10). It remains difficult to estimate the size of the impact the VAT hike in April 2014 will have on consumer sentiment and hence on consumption beyond the second and third quarter CHINESE ECONOMY STILL ROBUST SUBDUED PROSPECTS IN OTHER EMERGING MARKETS The big emerging markets have currently split into two different segments: On the one side, following a slowdown in the first six months, China picked up speed in the third quarter Dynamics are expected to remain lively in the short term (2013 GDP growth: 7.6 per cent). Not least the progressive reduction of overcapacities in industry, which result from structural changes, will lead to a downward tendency further down the line. For 2014 and 2015, KOF anticipates 7.3 per cent growth each year. The situation is different for the other economic heavyweights among the emerging markets, such as India, Brazil and Russia. Both the current situation and the prospects for the coming six months are unfavourable. This is predominantly due to tighter financing conditions which have predominated since the US FED announced the tapering of its bond-buying programme in May. This led to substantial shifts on the global financial markets, involving interest rate hikes, withdrawal of capital from emerging markets and devaluations in these countries. The largely shielded Chinese capital market was not affected. 8

9 AGENDA << KOF EVENTS KOF Research Seminar: tba Gábor Békés, Institute of Economics, Hungarian Academy of Sciences ETH Zurich, 8 January 2014 Tax Me if You Can! Optimal Income Tax Between Competing Governments Laurent Simula, Uppsala University ETH Zurich, 15 January 2014 Tax Competition, Migration, and Capital Mobility: The Role of Income Redistribution Assaf Razin, Cornell University, Tel Aviv University ETH Zurich, 21 January 2014 tba Bas Jacobs, Erasmus University Rotterdam ETH Zurich, 22 January 2014 Sectoral Technology and Structural Transformation Akos Valentinyi, Cardiff Business School ETH Zurich, 30 January 2014 Shake Me the Money! The Economic Impact of Natural Disasters: Evidence from Italian Earthquakes Riccardo Trezzi, University of Cambridge and Francesco Porcelli, University of Exeter ETH Zurich, 5 February 2014 Trade Adjustment: Worker Level Evidence David Dorn, Centro Estudios Monetarios y Financieros CEMFI ETH Zurich, 13 February 2014 tba Ian Wooten, University of Strathclyde ETH Zurich, 30 April >> >> KOF Media Agenda: >> 9

10 OTHER EVENTS 7th Annual Conference on the Political Economy of International Organizations Princeton (USA), January >> 2nd Dialogue Event of the ETH Risk Center with a focus session on: The Eurozone and Switzerland: A Network of Risk ETH Zurich, 17 January >> European Public Choice Society Meeting 2014 Cambridge (England), 3 6 April >> Annual Conference of the Spatial Econometrics Association (SEA) Zurich (Switzerland), 3 6 June >> 17th World Congress of the International Economic Association (IEA) Dead Sea (Jordan), 6 10 June >> Annual CIRET Conference Hangzhou (China), 9 11 October >> Add event: >> CUSTOMER SERVICE << The is a free service by which informs you about the latest developments relating to the economy, our research and important events on a monthly basis. Register: >> For previous s, visit our archive: >> Visit us at: >> You can also extract time series from our extensive database via the KOF data service (in German): >> The reproduction of this Bulletin (including excerpts thereof) is permitted only with the written permission of the publisher and with the citation of the original source. ISSN

11 IMPRINT << PUBLISHER ETH Zurich, KOF Swiss Economic Institute, WEH D 4, Weinbergstrasse 35, 8092 Zürich Phone I Fax I kof@kof.ethz.ch EDITORIAL TEAM Anne Stücker I David Iselin bulletin@kof.ethz.ch NEXT PUBLICATION DATES 7 February 2014 I 7 March

12 TABLES KOF Winter Forecast 2013 SWITZERLAND Real Gross Domestic Product by Type of Expenditure 12